Too good to be true - calendar spread?!

[fltrader1]

I'm mostly posting this to try and figure out what I'm not considering, this trade looks too good to be true.

The Jul 2022 CL contracts currently trade at 110.92 and the Dec 2022 contracts for 98.73. Could I not simply sell the forward month contract and buy the Dec 2022 contract and lock in the 12.19 spread over the next 6 months? With my current broker it would require margin of ~9,500 per contract. So, I'd receive a return of 64.2% in 6 months.

 

[maxinger]

You did extremely little homework.
so the chances of success are < 10%

You have to work very hard to do a calendar spread.

Trading is not for lazy people.

 

[globalarbtrader]

I'm mostly posting this to try and figure out what I'm not considering, this trade looks too good to be true.

The Jul 2022 CL contracts currently trade at 110.92 and the Dec 2022 contracts for 98.73. Could I not simply sell the forward month contract and buy the Dec 2022 contract and lock in the 12.19 spread over the next 6 months? With my current broker it would require margin of ~9,500 per contract. So, I'd receive a return of 64.2% in 6 months.

Several problems with this. Firstly if the spread moves against you by one tick then you will need to put up more margin. The real capital you would need to run this trade is much higher than you think.

Secondly, a minor point but the July 2022 CL contract expires in late June. So there is actually only about a month or so before this spread trade expires. If you continued to hang on after that you would just have an outright unhedged December position on.

Thirdly - and most importantly - you are not 'locking in' the spread, because there is no guarantee that it will converge to zero. Let's consider a different trade, X/Z. The spread on this is 1.5 points. Suppose you held that trade until just before expiry. What guarantee do you have the spread would be zero? Just before expiry the price of X would converge on spot and Z would be the front month. There is no reason why they would definitely be the same. Look at the prices on barchart for CL (that's a barchart screen shot, right?), since July 2022 has just expired this is probably a reasonable thing to do:

Spot is currently 110.33, and the front month (N) is about 0.7 points higher.

Now the spread would *probably* narrow from 1.5 to something like 0.7, since the spread of front month crude to spot is usually narrower than 1.5, but again this isn't guaranteed. There is no reason why it *has* to, just that on balance it probably will. And to reiterate, along the way it could easily blow out to 3, 5 or even higher; and you would be bust without sufficient margin.

Spread trading is not for the faint hearted. It's actually much riskier than outright trading, if you use leverage to get the sorts of expected returns you seem to expect. You seem to have a lack of basic understanding about how futures work, which you should really get before you trade outright futures, never mind spreads.

GAT

 

[Robert Morse]

When the July contract goes into the delivery phase, are you going to deliver 1,000 barrels of the correct quality to the buyer? DELIVERY PROCEDURE - Delivery shall be made free-on-board ("F.O.B.") at any pipeline or storage facility in Cushing, Oklahoma with pipeline access to Enterprise, Cushing storage, Enbridge, Cushing storage or Plains, Cushing storage. Delivery shall be made in accordance with all applicable Federal executive orders and all applicable Federal, State and local laws and regulations. At expiration of the July contract, you do not end up short a stock or future that is then hedged with the December contract.

I'm mostly posting this to try and figure out what I'm not considering, this trade looks too good to be true.

The Jul 2022 CL contracts currently trade at 110.92 and the Dec 2022 contracts for 98.73. Could I not simply sell the forward month contract and buy the Dec 2022 contract and lock in the 12.19 spread over the next 6 months? With my current broker it would require margin of ~9,500 per contract. So, I'd receive a return of 64.2% in 6 months.

 

[arbs-r-us]

Without the uneddumukated, how are we going to earn a living???

 

[Overnight]

I'm mostly posting this to try and figure out what I'm not considering, this trade looks too good to be true.

The Jul 2022 CL contracts currently trade at 110.92 and the Dec 2022 contracts for 98.73. Could I not simply sell the forward month contract and buy the Dec 2022 contract and lock in the 12.19 spread over the next 6 months? With my current broker it would require margin of ~9,500 per contract. So, I'd receive a return of 64.2% in 6 months.

You are assuming that the Dec contract will not move in price between now and Dec 2022. Which you must know, is ludicrous to think.

I think GAT articulated the problems here better than I could, and it is also of note...You seem to be talking about a manual legging of a spread. That is what I started my trading career with...Manually legging CL months, rather than an exchange-traded spread. So I have experience in that space.

If you want to try a much safer experiment with your idea, you can right now go and short Nov 22 and long Dec 22.

Go on, do it right now. You will have minimal risk, because the contracts all move in sync with each other, and you get a margin offset credit from the exchange. The margin requirement would be a couple hundred bux. Whoopie.

But as you get closer and close to the expiries, you will see that you won't be getting much if any arbitrage, because of aforementioned synchronous moves and spread issues.

At the end of the experiment, you can close out both positions at the same time for a minimal win or loss. But it won't hurt much to try it with real monies!

Give it a whirl!